Tuesday, November 8, 2011

Beware of Little Old Ladies With Signs - Why The Tea Party Should Compromise on NO New Taxes

Congressman who are proposing to reduce the U.S. deficit with plans that do not include tax increases should view the video of a mob of senior citizens chasing former House and Ways Committee Chairman Dan Rostenkowsi down a Chicago street. This episode was certainly humbling for Rosty. However, the anger generated over his attempt to rein in Medicare costs may pale in comparison to the fury produced by the cuts required to make a dent in the U.S. budget deficit. In 2011, the U.S spent $3.6 trillion and only took in $2.3 trillion. Closing this $1.3 trillion gap is going to require drastic action. Heck, the deficit Super Committee is having difficulty just coming up with $1.2 trillion in deficit reductions spread over 10 years. The Deficit Supercommittee at best will only make a dent in the deficit. Even if they do reach an agreement, if it is politics as usual, the deficit reductions may be back ended toward the last half of the decade.

The Tea Party should realize that their electoral success in 2011 had as much to do with an electoral backlash against entrenched government as it did with a mandate to cut government spending. As the declining popularity poll numbers for Scott Walker in Wisconsin and for John Kasich in Ohio show, voters support is extremely fickle for tough measures required to solve the budget deficit mess. And given the size of the federal deficit, the only way to slash into it is to make deep cuts in social security, medicare, medicaid, and defense. Making any headway in cutting entitlements or defense is going to be incredibly contentious. Given that health care, pensions, and defense eat up 24%, 22%, and 25% of federal spending, even if all other government spending was eliminated, there still would not be enough savings to balance the budget. All other federal government spending combined only totals $1.05 trillion, only 80% of the size of the deficit.

Thus if Tea Party politicians are really serious about cutting into the deficit, cuts in entitlements are required. And these entitlement cuts are going to anger little old ladies as well as other segments of the population. Given how deep the cuts will be, it will almost certainly be impossible to garner support for these spending reductions without expanding the backing for them with populist tinged tax increases. The attitude of many voters was expressed by this letter writer to the Chicago Tribune, "I am so furious at the Republicans of Congress I could spit. Putting a knife to the throats of the seniors, the poor and the disabled by trying to preserve the tax cuts for the wealthy is abominable. They keep calling the wealthy the "job makers. They've had the tax cuts for years and where are the jobs?"

Frankly, I think that many of the Tea Party Congressman that will not bend on allowing some of the Bush era tax cuts to expire in a trade off for budget cuts are horribly misreading the will of voters. There is even political cover for allowing the Bush tax cuts to expire as "Not continuing a tax cut is not technically a tax increase," according to influential tax reformer Grover Norquist. When Norquist was asked if doing so it violates anti tax pledges, he said, "We wouldn't hold it that way." An argument could even be made that an absolute refusal to agree to a compromise that include tax increases makes it impossible to come up with a solution that can attract enough votes to gain legislative approval for deficit cuts. While "no new taxes" plays well the conservative base, it is not a position that can win legislative passage. Refusing to compromise on increasing taxes as a component of a deficit cutting plan may even exacerbate the problem, as U.S. debt worsens each day the politicians in Washington remain stalemated.

Back in the '90's, Canada proved that it is possible to get a huge budget deficit under control. Their solution is instructive. The Canadian ratio of budget cuts to increased taxes was 6 or 7 to 1. The Canadian experience provides support for a position that should be much more palatable to voters than a plan that exclusively targets spending cuts. Further, it has the added merit of actually having worked.

For the most part, American voters are unaware of how great the risk of severe economic decline is if the U.S. continues to run up huge deficits. Fiscal conservatives need to get far better at educating the American public about the coming economic catastrophe if the U.S. government continues to kick the can down the road. Americans will face an economic collapse that is as nasty or worse than the one the Greek people are living through. While the reporting on Greece is focused on politics, the Greek economy is so awful that many are in despair and the suicide rate is up 40%. At best, it will take the Greek economy years to recover.

It is critical to the future of the U.S. and all Americans born after 1955 that the deficit be curbed. And getting long term support from voters to make the meaningful reductions on the deficit will require compromises on raising taxes.

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The U.S. economy is headed for a train wreck if we continue to run up trillion dollar deficits and pump millions of tons of CO2 into the atmosphere. The dual problems of the growing national debt and carbon emissions threaten the future sustainability of the U.S. economy.

Americans are by nature optimistic, but if we continue to keep our head in the sand in regard to these issues and continue on a business as usual path, the result will be an economic calamity.

The goal of this blog is to sound the alarm and suggest solutions before it is to late to save the U.S. economy from a bleak economic future.

This blog also reports on investment tactics that some traders are utilizing to provide protection in the event that we fail to turn things around and economic downturn spirals into a depression. However, the blog content is for informational purposes only and does not constitute financial advice. Author Randy Pickard is not a licensed financial professional.